Toll, operate and transfer: Highways deal a good start

By Anjan Dasgupta, HSA Advocates

A consortium led by Macquarie, an Australia-based capital fund manager, has bagged the tolling, operation and maintenance rights for a bundle of nine stretches of national highway, all completed and in operation, on a public-private partnership (PPP) basis. This is the first time the government of India through the National Highways Authority of India (NHAI) has auctioned projects which are completed and in operation under the toll, operate and transfer (TOT) model to monetize assets.

Anjan DasguptaPartnerHSA Advocates
Anjan Dasgupta
HSA Advocates

The projects are to be handed over for a concession period of 30 years for tolling, operation and maintenance, after which the projects are to be transferred back to the NHAI. The government completed construction of these projects using its own sources of funds. The consortium was selected through international competitive bidding on the basis of quoting the highest aggregate concession fee for all the nine projects in the bundle. The concession fee for a project was the summation of the net present value of net free cash flow expected to be generated by the project during the entire concession period as estimated by the consortium applying the consortium’s own discount rate. The aggregate concession fee as quoted by the consortium of Macquarie and Ashoka Buildcon for upfront payment to the NHAI was ₹96.81 billion (US$1.45 billion). This was 54% higher than the initial estimated aggregate concession fee of ₹62.58 billion for all the nine projects calculated by the NHAI. To calculate the initial estimated concession fee for a project the NHAI applied a discount rate of 3% over the bank rate for debt, as then specified by the Reserve Bank of India, and a normative rate of 14% for return on equity.

Apart from the winning bid, three other bids were received, from Brookfield (₹75.11 billion), IRB and Autostrade (₹69.3 billion) and Roadis and National Investment and Infrastructure Fund (₹66.11 billion). The nine highway stretches totalling about 680 kilometres are in Andhra Pradesh and Gujarat. The NHAI has started preparing detailed project reports for an additional 1,700 kilometres of completed stretches, which it plans to bid out using the TOT model.

Under the TOT model, the pre-construction and construction risks, the project financing risk and initial operational risk of a project are totally borne by the government prior to handing over the completed projects to the private parties. Risks associated with pre-development works, land acquisition, resettlement and rehabilitation, enviornmental and regulatory approvals, time and cost overruns, and high cost of funds during the construction phase are managed by the government as the government undertakes completion of construction and initial operation of the projects solely at its own risk. After handover of the projects, the consortium assumes the projects’ finance, availability and market risks. Since the handed over projects are completed and in operation, the cost of finance is relatively less. The consortium has to ensure delivery of services at the required quality standards, which entails availability risk. The government can apply penalties if the consortium defaults on its service obligations. Market risk involves traffic risk, which falls on the consortium.

Success of the first round of bidding under this model has proved that there is good private finance appetite for operational infrastructure projects. This paves the way for financing of such projects by the government through use of public finance during the construction phase, when the risk is significantly higher, and thereafter, monetizing the constructed assets for an upfront premium during the operation phase. This bodes well for future infrastructure projects in India looking at attracting long-term capital providers such as pension funds.

This model can be replicated in other infrastructure sectors provided the government carefully selects the sector and pools the assets, where construction has been completed with government funding and operations have started. For achieving optimum results with any PPP model, the contractual framework contained in the concession agreement would need to be balanced, fair and transparent. Further, clear allocation of risks and obligations in respect of the different participants has to be achieved. The framework has to be based on best practices taking into account lessons learned from previous PPPs and extensive consultation with experts and stakeholders including government ministries, prospective investors and lenders. To start with, the government is looking at replicating this model in the airports sector. State governments can also start replicating this model for PPP projects in their respective states.

Anjan Dasgupta is a senior partner at HSA Advocates. HSA, a full-service firm with offices in New Delhi, Mumbai, Bengaluru and Kolkata, worked with the NHAI on the auction of projects described above.

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